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October 03, 2011

Expanded Medicaid Estate Recovery Law

Dear Clients:

New York State has recently expanded the basket of goods to which the Medicaid Estate recovery departments at the County level can file liens upon. A good Medicaid planning tool has been to deed the potential program applicant’s principal residence to a child or children and retain a “life estate”, the right to live in the home for the duration of one’s life. This life estate property interest terminates upon the death of the individual, and, and since the real property is not in the estate of the deceased Medicaid Applicant-Recipient (AR) of nursing home services, there is nothing for the State Medicaid Recovery Departments to file a lien against.

The 2011 changes to Section 369 of New York’s Social Services law and regulations, however, have created a “Medicaid Estate”, which includes a life estate “to the extent of the decedent’s interest in the property immediately prior to death”. 1

The law also includes jointly held assets and trusts in the group of property interests in which the government can recover against.

There are no protections in the law for assets transferred prior to its enactment. In addition, the duration of the Medicaid lien is not stated.

The writer believes that this new law may violate constitutional protections and prove to be unenforceable. Clearly, to date, the only individuals responsible to pay for the support of an AR are a spouse or a parent. This new law makes remainder beneficiaries under a life estate deed or trust, usually children, indirectly responsible for the support of their parents in that they are repaying the State for providing nursing home services to a parent.2 It is a form of retroactive support, in that the recipient of the services is deceased, and, in cases where all the assets are passing outside of the decedent’s probate estate to survivors of jointly held assets and remaindermen of life estates and trusts, the recipient has legal title to the asset at the time the lien is filed. The law’s fallacy is that it claims to be placing a lien on the “Estate” of the AR, when, in all reality, the notice of lien creating the encumbrance is filed AFTER the demise of the AR, at a time when title to the property has already passed to the joint owner or remaindermen under settled common law of trusts and estates.

Usually, a lien must be originated by filing something and upon that exercise, it “attaches” to a property interest. Common examples are a judgment lien and a mechanics lien, both of which are generated by filing a document with a court clerk, and they become effective upon the date of filing against any subsequent transfers of the liened property interest. The filing of the lien of a Medicaid claim under the new statute, however, a post-mortem filing when the decedent no longer has any interest in the subject property, cannot “attach” to a property interest of the decedent. It is really encumbering the interest of the beneficiary, and, when that beneficiary is a child as in most cases of family Medicaid planning, the lien becomes a de facto claim against a child for filial support of a deceased parent. While there are strong moral arguments in favor of children providing support of their poor and aging parents, New York State does not have a filial support law.

It seems that the proper court for adjudicating the value of and entitlement to the lien would be the Family Court, where support proceedings are held while the transferor is living, not the Surrogate Court, which administers assets of decedents’ estates.

Until the law becomes settled in this area, every real estate title that has a life estate deed in its chain of ownership will be questioned. The certainty of real property law is a fundamental right of every citizen, yet, this law will have title examiners asking, “Will a notice of medicaid lien be filed against the property?” Recording fees will increase because of the need for an affidavit at the real estate closing to address whether or not the life estate holder ever received Medicaid services, whether inside or outside of a Skilled Nursing Facility. If Medicaid services were received by the decedent during his or her life, then the Social Services Department will have to be contacted prior to a post-death sale of the property to estimate the amount of services rendered and the age of the AR at or “immediately prior” to his or her death, in order to value the lien. Will a bona fide purchaser be free of the lien if the Notice of Lien document is not filed until after they have purchased the property against which the lien is claimed? There is no language in the new statute as to the effective date of the lien. Is it effective as of the date of death? Instead, is it effective as of the date of filing or some other date? How long does the lien last? None of these questions have been answered at this time.

One good thing is that the method of valuing the lien is set forth in the statute. The law limits the lien to the value of the property or the amount of the Medicaid claim, whichever is less. The value of the property is determined by reference to actuarial tables based upon the age of the decedent at the time of death. The tables provide a life estate factor, which when multiplied by the fair market value of the property at the time of death gives a product equal to the amount of the lien. The life estate factor is computed using the IRS tables for life estates under Section 7520 of the Internal Revenue Code. (Table S). One must first look up the Applicable Federal Rate (AFR), an interest rate published by the Federal Government, to get to the right table.

These life estate tables may result in liens amounting to as much as twenty to twenty-five percent of the value of the entire property. It seems rather arbitrary that the beneficiary must pay this amount to New York State Medicaid in order to clear title to his property interest, created many years earlier by a parent who merely wanted to transfer his home to his children and retain the right to live in it for the duration of his life (life estate). Often the initial property transfer has been penalized by Medicaid at the time of the initial application for services because it was made within five (5) years of application. (Look back rule). Why should it be penalized again and money taken from the pocket of the beneficiary? Should not a prior penalized transaction obtain an exception from the estate recovery claim? I believe the possibility for uneven enforcement is great. This is a constitutional substantive due process issue.

In conclusion, our clients will have to evaluate this new law, and the future complications it brings for families who wish to understand Medicaid and plan for the possibility that an aging parent will need its benefits. For parents who want to pass real estate to children upon their death through the use of a life estate deed, the new law will create financial headaches for the children at a time when they are already grieving for their deceased parent. Alternative forms of ownership should be investigated while the parents are living and prior to making the decision to make a lifetime transfer directly to children with a reserved life estate for the parents.

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1 18 NYCRR 360-7.11(a)(1).
2 See 42 CFR 435.602 "deeming rules" for resources and income for MA eligibility.